Sources of Economic Growth

• Author: Abdel Senhadji
• Pages: 2-3

In the vast empirical growth literature, research on the sources of economic growth, based on the growth accounting framework, has received particular attention since the widely publicized papers of Alwyn Young and Paul Krugman in the mid-1990s.

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Page 2

Since the mid-1990s, there has been an abundant literature extending Young's growth accounting exercise to more countries and/or refining his methodology. The growth accounting framework was first presented in Solow (1957). ² It is based on an aggregate production function and decomposes real GDP growth in terms of contributions from factor inputs and total factor productivity (TFP). Therefore, the results of the growth accounting exercise depend on the specification of the production function.

Several IMF studies have contributed to the debate on sources of growth in East Asia. Using internationally comparable data and factor shares, based on the industrial structure, and the level of development of economies, Sarel (1997) finds, contrary to Young, that the TFP growth has been impressive in Singapore, Thailand, and Malaysia. ³ These results are corroborated by Crafts (1999), using different data sets, and Iwata, Khan, and Murao (2002), using nonparametric methods for estimating a very general production function. ⁴

Numerous other studies have focused on other regions. Hu and Khan (1997) find that the contribution of TFP in China's growth has been increasing, especially during the reform period . ⁵ El-Erian and Helbling (1997) argue that growth in the Arab countries region was overly reliant on volatile external sources of funding and TFP growth was too low. The importance of market- friendly institutions are emphasized, in Dhonte, Bhattacharya, Yousef (2000), in absorbing the demographic explosion in the Middle East and sustaining adequate growth in GDP per capita. ⁶ Ghura (1997) finds empirical evidence of increasing returns to scale for the aggregate production function for Cameroon stemming from positive externalities in physical and human capital. ⁷ Hugo (1999) shows that despite a large investment-GDP ratio in Honduras, growth has been hampered by low TFP due to deficient levels of human capital and inadequate composition of investment. ⁸ According to De Broek and Koen (2000), the severe contractions in Russia, the Baltics and the other countries of the former Soviet Union reflected not only collapsing investment and shrinking employment but also sharp declines in productivity because of the transition to a market economy. ⁹ Even after correcting for factor utilization during the transition process, Dolinskaya (2001) finds a similar result for Russia. ¹⁰ Cerisola and Chan-Lau (2000) find that investment-specific technical change is the major underlying cause of the pickup in productivity in Canada and narrowing of the productivity gap with the United States. ¹¹ Calderón (2001) finds that the differential in productivity growth across OECD countries could be accounted for, to a large extent, by measurement errors. ¹² Cardarelli (2002) shows that most of the divergence in income per capita between Australia and New Zealand is the result of lower capital accumulation, and to a lesser extent, lower TFP growth in New Zealand. ¹³

While the basic growth accounting exercise which decomposes real GDP growth into contributions from factor inputs and TFP is a useful initial exercise, it does not, however, explain why certain countries enjoy faster TFP growth than others. Some of the empirical literature on sources of growth has explored the determinants of TFP. Bayoumi, Coe, and Helpman (1996) show that a country can raise its TFP not only by investing in research and development (R&D) but also by trading with countries with high levels of R&D. ¹⁴ Similarly, Coe, Helpman, and...